“Something Has Gone Wrong”: UK Government, Banks Screw Up Coronavirus Loans, Small Firms Near Collapse. Better Results in Other Countries

Part of the problem is cultural: big banks in the UK don’t like lending to small businesses, especially not at 1.5%.

By Nick Corbishley, for WOLF STREET:

Thanks to its Brexit planning, the UK should have been better positioned to help its small businesses through the coronavirus crisis than most of its European peers. In early 2019, the UK treasury, together with the business department and the state-owned British Business Bank, laid the groundwork for a loan guarantee system for small businesses in the event of a chaotic Brexit. This meant that when the Covid-19 lockdown began, all the government needed to do was dust off those plans and put them into action. It should have been smooth sailing. Instead, it’s been an unmitigated disaster.

On March 19, the day the economy went into lockdown, the government unveiled £330 billion of emergency measures to help shuttered businesses weather the storm. Those measures included the Coronavirus Business Interruption Loan Scheme (CBILS), which the Chancellor of Exchequer Rishi Sunak said would be made available to “any good business in financial difficulty who needs access to cash to pay their rent, the salaries of their employees, pay suppliers, or purchase stock”. Yet almost four weeks later, just 4,000 of the 300,000 companies that have applied for the funds have actually received them.

“Something has gone wrong,” warned former Bank of England governor Mervyn King on Sunday. Due to a combination of voluminous government red tape, complex eligibility criteria, massive roadblocks erected by the participating banks and the temporary closure of a large number of bank branches, the amount of money so far lent out by UK lenders to small or mid-sized businesses is just £800 million pounds. That’s less than 0.25% of the total £330 billion pledged in loans for businesses, small and large.

In Switzerland, with a population roughly one eighth the size as the UK’s, 76,000 small businesses had received emergency loans worth more than CHF15 billion ($15 billion) as of April 6. Since then, the Swiss government has doubled the facility from CHF20 billion ($20.8 billion) to CHF40 billion ($41.6 billion). The much-lauded loan scheme’s success appears to rest on two basic pillars:

One, simplicity and speed. To qualify for a loan of up half a million francs, small business owners merely have to fill in a one-page form containing six basic questions, which they must answer honestly. Once the form is sent to the bank, the application is approved or rejected within no more than 24 hours. If approved, the loan is interest free, does not include penalties and is repayable in five years.

Two, zero risks for banks. All loans of up to CHF500,000 are 100% guaranteed by the state, meaning the banks have nothing to lose and are therefore less worried about the risk of providing financial lifelines to businesses whose future is far from certain, even with the loans.

In the UK, by contrast, 80% of each loan is guaranteed by the state, which means banks must assume 20% of the risk of non-payment. Even before this crisis began, large UK banks were already reticent about lending to small businesses. Worse still, many of the small firms they have lent to ended up being lumbered with dodgy financial products such as payment protection insurance (PPI) or interest rate swaps, which had an annoying tendency to harm or destroy the business’ financial health while making the bank bucket loads of money,

A large part of the problem is cultural: most big banks in the UK just don’t like lending to small businesses anymore, especially if the interest rate they stand to earn on the loan is as low as 1.5%. Yet in other European countries where emergency business loans are not fully backed by government and the interest on loans is also pretty low, large amounts of funding are already flowing to businesses.

Even in Spain, which is not exactly famed for the speed of its bureaucracy and where the government is also guaranteeing up to 80% of emergency loans and loan renewals, some €30 billion has been disbursed by the banks in the past month, many of them to SMEs. Just one lender, Caixabank, says it has so far granted €8 billion to businesses — ten times more than the whole of the UK banking sector. It’s not all wines and roses, of course. Some banks are breaking the spirit, if not the letter, of Spain’s emergency loan legislation by green-lighting loans only if a borrower agrees to take out another financial product such as life insurance.

Other countries have also had their share of problems. In Germany the emergency loans system got so overloaded at its launch that it bogged down, while in France many companies are buried under mountains of paperwork.

But nowhere has the approach been so poorly designed and implemented than in the UK. The system has already been through one major overhaul in which banks were banned from demanding personal guarantees from borrowers of loans of less than £250,000. The banks were also prevented from requiring small firms to apply for a commercial product before being considered for an emergency loan. Despite these changes, the system is still failing to get anywhere near enough money to the millions of businesses that need it.

Many business owners have said that without an emergency loan they will not be able to pay staff at the end of this month. A network of accountants serving more than 12,000 SMEs called the Corporate Finance Network recently warned that as many as a fifth of small businesses in the UK will go out of business in the next three weeks if they don’t receive the emergency cash.

“The economy will recover quickly only if we can keep the businesses that existed at the beginning of it still functioning and still able to pick up the reins when the epidemic is over,” Mervyn King said in his interview with Sky on Sunday. For that to happen, both the UK government and UK banks will have to get their act together and their priorities straight pretty quickly. By Nick Corbishley, for WOLF STREET.

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  52 comments for ““Something Has Gone Wrong”: UK Government, Banks Screw Up Coronavirus Loans, Small Firms Near Collapse. Better Results in Other Countries

  1. WT Frogg
    Apr 14, 2020 at 1:53 pm

    Obviously, the K.I.S.S. Theory has gone extinct in the U.K. although from looking at past history in a variety of areas ( automotive electrics ) being one) I’m not sure it ever existed there.
    Pretty sad for small business owners as they are the lifeblood of many countries.
    It would appear the adage: ” If you want to screw something up give it to a committee but to really turn it into a total balls up affair make sure it’s a government committee. ” still holds true.

    Good article Nick

    • 91B20 1stCav (AUS)
      Apr 14, 2020 at 7:29 pm

      W.T.-and surely you know the old one: “…why do the British drink warm beer? Because they use Lucas refrigerators…”. (Actually a bit unfair, Lucas’ cheap ‘n nasty products were built to price&spec dictated by their ’50’s-’60’s auto/moto customer managements- they could do very good work, price commensurate).

      May we all find a better day.

      • Sit23
        Apr 16, 2020 at 3:22 am

        Lord Lucas, the Prince of Darkness,. Inventor of the self dimming headlight, and the intermittent windshield wiper.

      • Dos Tacos Mas
        Apr 17, 2020 at 6:48 pm

        Q: Why doesn’t the UK have a computer industry?

        A: They couldn’t figure out how to make one that leaks oil…

  2. Brant Lee
    Apr 14, 2020 at 2:02 pm

    Perhaps in the U.S., a business could go to the IRS online and answer one simple question? Your credit rating is over 700, Do you wish to borrow 10-30% of last year’s taxable income? Yes or NO.
    Get things settled the following tax filing.

  3. JoAnn Leichliter
    Apr 14, 2020 at 2:02 pm

    I believe that President Trump’s small business loans have been made mostly through smaller, local banks. It just makes sense.

    • c_heale
      Apr 14, 2020 at 8:50 pm

      There are no real small local banks in the UK any more.

      • Craog5
        Apr 15, 2020 at 7:51 am

        There are lots of small cedit unions in the UK.although they might be unable to loan to many businesses at 20% of the risk.

        It would be something. Of course that loses the big bankers their cost taxpayers relations.

  4. Realist
    Apr 14, 2020 at 2:24 pm

    Excellent article. Interesting indeed if the British measures are based on their exit emergency plan because that indicates a possibility for a quite messy exit.

    As a cynic, usually banks regard small businesses as something to be taken behind the shed, why would it be different this time ? That’s the way it was the last time, the time before that ad nauseam.

    • Deanna Johnston Clark
      Apr 14, 2020 at 4:30 pm

      …and the British govt. has traditionally been least sympathetic to its own citizenry. Even the saintly Wilberforce gave no time or liking for the poor of his own country.

      They will help the broke and lazy, but never the working poor.

      • 91B20 1stCav (AUS)
        Apr 14, 2020 at 7:39 pm

        DJC-Kipling’s ‘Tommy’:

        “…and it’s Tommy this, and Tommy that, and ‘Throw him out, the lout!’

        but he’s ‘The savior of ‘is country!’ when the guns begin to shoot…”.

        May we all find a better day.

    • Frederick
      Apr 15, 2020 at 2:11 am

      I had lots of very valuable collateral and when in business as a builder back in the 90s was never able to get a loan from a bank My lawyer was my bank and we both made a lot of money

      • X-Pat DE
        Apr 16, 2020 at 10:53 am

        Same as my sister. Hairdresser. The FC of 2008 the adjoining property to her shop came on the market. Banks refused to loan her £30,000!
        Fortunately I had enough to loan her at 0% and her partner could also put up £30k, so the property was bought (a steal!) and kncoked through into what has (until corona lockdown) been a booming business.
        She paid me back within a couple of years.
        As the expression goes, the banks are the places which will lend you money when you don’t need it!

  5. Jdog
    Apr 14, 2020 at 2:36 pm

    Human beings are not for the most part compassionate, or even civilized.
    Tragedies, and disaster today are seen by many as an opportunity to profit. It is when the lions eat the sheep.
    Like animals much of human kind see the weakness as an easy opportunity to feed. There will be two predators in this crisis, one being the economic destruction that will be let loose as a result of deflation and it’s spiraling effects, and the other being the corporate entities that will show no mercy upon any weakness they can exploit.
    The take over of weak banks by strong ones in 2008 was only a dress rehearsal for what is coming now.

    • Raul
      Apr 14, 2020 at 6:14 pm

      Deflation!!! So you think giving out a bunch of money to everyone (when theyre not working), no one producing in factories and most businesses, will cause deflation. There are going to be supply issues even with food production, factory shutdowns due to Covid, which will cause decrease supply…that’s how Inflation happens! A lot of money chasing fewer goods

      • Synergy
        Apr 15, 2020 at 12:24 pm

        So far the supply disruptions have been minor and limited to things like toilet paper. People are buying less of things as well since shops are closed. Top that all with the fact the debts people owe are still not going anywhere and will still need to be paid off. Even when money comes in those debts need to be paid.

  6. Iamafan
    Apr 14, 2020 at 2:41 pm

    Countries used to have Development Banks. Time to polish them again. Most especially at the State level.

    • Gordian knot
      Apr 14, 2020 at 2:50 pm

      Why not let depositers fund it through crowd funding gaurenteed by the government at two percent. That’s better than what the bank is paying.

      • Mel
        Apr 16, 2020 at 7:37 am

        The government’s problem is to find agents who will distribute the money in some kind of an honest way. Banks were the best they could think of in that regard. Crowdfunders are probably the worst, given that they would be mostly just people who show up at random. Plus people who are only there for the govt guarantee.
        And AFAIK, Crowdfunding is really old-fashioned lending where lenders only provide money that they weren’t going to spend themselves. The emergency now is that very few people have money that they aren’t planning to spend.

  7. David Hall
    Apr 14, 2020 at 3:26 pm

    Lenders like collateral.

    In China nearly 500,000 businesses were bankrupted by the shutdown (CGTN). China is suffering inflation.

    Vehicle sales in India have fallen 50% YOY due to their shutdown (NDTV).

    • Iamafan
      Apr 14, 2020 at 3:39 pm

      In my opinion, this is the issue. Most borrowers have lousy collateral and future cash flows are questionable. No one wants to be a lender under these conditions. They are dreaming if they think tomorrow is super clear.
      Interest rates have to rise to reflect risks. Too bad this happened.

      • Cas127
        Apr 14, 2020 at 4:02 pm

        Iam,

        Agreed – people don’t realize that a big, big reason for the last 20 years of ZIRP was to keep an ocean of marginal businesses alive (the only other reason was to keep a marginal government alive…).

        Any lending entity that looks at the financial details of this ocean of companies…is going to be very, very slow to lend – absent something near a 100% guarantee from the equally craptastic, but Print Privileged G.

  8. Michael Engel
    Apr 14, 2020 at 3:57 pm

    SPX inside Jan 29/ 30 2018 gap < Jan 26 2018 peak @ 2,872.87.

    • Shiloh1
      Apr 14, 2020 at 4:37 pm

      Michael,

      Does this sort of thing matter when the FED / Treasury is tilting the pinball machine?

      • p coyle
        Apr 14, 2020 at 11:01 pm

        powell and munchkin don’t particularly strike me as the pinball wizard type. if only the fed/govt had a functional, built in tilt mechanism…

        • Frederick
          Apr 15, 2020 at 2:14 am

          No, but Munchkins wife sure does and she’s running the show anyway, right ?

  9. joe
    Apr 14, 2020 at 4:14 pm

    Meh. The government lies. They know by the time you figure it out they will launch a new squirrel.
    Charlie Brown never wised up to Lucy either.
    If you don’t have a lobbyist passing out candy, you aren’t getting anything.
    https://www.rollcall.com/2020/04/13/small-business-funds-dwindle-as-virus-aid-package-sputters/

  10. Twinkytwonk
    Apr 14, 2020 at 4:25 pm

    The Banks were certainly efficient in reducing saving rates to between 0 and 0.1%. I think they posted the letters out to people the exact same day that rates were dropped.

    Regarding the goverment, they are typically useless but my lady wife who is on the very high risk register was contacted by government to say that they will be supplying her with a free weekly food parcel as she (we) cannot leave the house for twelve weeks. Yes it came on the Tuesday when they said it would actually come on the Sunday but I was surprised that it turned up at all.

  11. ed
    Apr 14, 2020 at 4:30 pm

    Nothing to do with this subject, but i just noticed Tesla going up almost 10%, almost all stock exchanges in green. Am i missing something, i cant wrap my head around it.

  12. Tim
    Apr 14, 2020 at 4:35 pm

    ‘To qualify for a loan of up half a million francs, small business owners merely have to fill in a one-page form containing six basic questions, which they must answer honestly’

    Oh come on, really!!

    • Nick Corbishley
      Apr 14, 2020 at 5:01 pm

      Tim, the small business owners will by and large be applying for the funds from their regular banks, with whom they already have a well established relationship and credit history. Plus, Switzerland is, if nothing else, a nation of bankers. They do this stuff very well.

      It was an article in the latest edition of The Sunday Times (from the UK) that mentioned the “six basic questions”. Here’s a link to it, although it is behind a paywall:

      https://www.thetimes.co.uk/article/coronavirus-in-europe-efficient-swiss-slalom-round-the-pandemic-avalanche-tq7s9pvfm

      The Financial Times (also behind a paywall) said the following in an article from April 6 (https://www.ft.com/content/9ab135d3-f85e-4ca8-9bb4-0e487e134b10):

      “It took Matthias Knauer only a minute or two to complete and scan the single-page form for a liquidity lifeline from the Swiss government. About 30 minutes after sending it, the money was in his company’s account.”

      • Iamafan
        Apr 14, 2020 at 8:23 pm

        I guess they’re lending to fail. Then later they will sue and take over everything.

    • fajensen
      Apr 15, 2020 at 1:53 am

      It is only Money, it is not like it is scarce or anything!

  13. Fabio Castellanos
    Apr 14, 2020 at 5:00 pm

    Interesting article and quite contrasting cases between the UK and Switzerland.

    When you say that 100 pct of loans are guaranteed, how does the Bank cover the funding costs of making the loan? Or, are funding costs / administrative costs so low that they just don’t need to be even considered? Or can the banks fund themselves at zero cost from the government?

    Thanks

  14. S
    Apr 14, 2020 at 5:04 pm

    I don’t see any reason why the U.S. Fed can’t bail them out. They are bailing out everyone else, illegally.

    I wonder out loud whether the western government of Australia will eventually seize the gold and silver at the Perth Mint? Most surprising is the fact that the government of resource rich Australia has very little gold to call its own.

  15. Randy Oldman
    Apr 14, 2020 at 5:09 pm

    Guess I’m one of those conspiracy guys- “never let a crisis go to waste”. Let them go down and we’ll buy up the remnants for pennies on the pound.

    • fajensen
      Apr 15, 2020 at 1:55 am

      They will screw that operation up too: If there is a worse way of doing anything, the British will find it :)

    • Frederick
      Apr 15, 2020 at 2:16 am

      Funny how that works right? I’ve noticed more and more like you of late Randy Coming to the conclusion that all the so-called “ tin foilers” have been right all along Well, not ALL of them but most

  16. Olivier
    Apr 14, 2020 at 6:08 pm

    The UK is the country where a major bank (RBS, I believe) had a division dedicated to pushing its SME customers into bankruptcy after bleeding them dry (not unlike private equity, come to think of it). So what did you expect?

    • patrick lewis
      Apr 15, 2020 at 7:04 am

      RBS was only one of those banks
      Halifax was another and if I remember some of the managers were prosecuted and sent to prison.
      businesses need all the help that they can get but what we are experiencing is the accounts offices of the big boys are shut and that’s what the main problem i.

  17. kk
    Apr 15, 2020 at 1:42 am

    Coronavirus is killing those who are tired and weak especially those with underlying health issues- people and businesses.

  18. JohnM
    Apr 15, 2020 at 1:58 am

    Don’t be so pessimistic. The banks are looking to profit greatly from this disaster, as always. The govt didn’t have to give the dosh to the banks, they could have shifted it via HMRC.
    As always, the bankers are *ankers.

    • Frederick
      Apr 15, 2020 at 2:54 am

      They sure ARE that John and I can think of a few more monikers to describe them but I will leave that to your imaginations everyone

    • Craig
      Apr 15, 2020 at 7:54 am

      This. They could have prioritised mask and ventilator companies too. Of course they could have let the business on life support die a long time ago.

  19. steve
    Apr 15, 2020 at 2:41 am

    ” they will not be able to pay staff at the end of this month.”

    but staff they dont need are being paid by the government anyway?

    Slightly confusing statement.

    • Tim
      Apr 15, 2020 at 10:56 pm

      No. Businesses pay laid off workers now, government repays them later, in June at the earliest. Banks are unwilling to fill the gap.

      This is a cash flow squeeze, which could break numerous businesses.

  20. Apr 15, 2020 at 3:23 am

    Here in the UK, some years ago, we had a series of government institutions called Regional Development Agencies, RDA’s; mine was SEEDA South Eastern Economic Development Agency, and at the time, I applied for a government grant and was required to sit down with an external “agent” to discuss terms. The conversation developed into a totally unexpected area; as a limited company director, I was told, in no uncertain terms, that if I want him, (the agent), to address my needs to SEEDA, the very first requirement was to agree to transfer shares in my company to SEEDA; that the agent could not even contemplate an approach to SEEDA without my agreement to make such a transfer. I feel sure than any truly independent business owner would react as I did; the interview became heated; he would not budge and I walked away.

    Some time afterwards, it was discovered that these RDA’s had been using the substantial sums of government money, supposedly provided to supply grants to businesses in their regions, to buy land, properties and businesses throughout the nation. From what I could make of it, every penny given to the RDA’s for “economic development of the nation” was instead used to fill the pockets, (and thus the financial and career needs of the civil servants involved). That the senior levels of the United Kingdom Civil Service were, (and still are), intent on running their operations as a new form of Mafia.

    When the full details emerged, the RDA’s disappeared. No charges levelled, no one brought to any form of justice; assumed they were simply dispersed into the wider “mafia family”. And that brings up RBS, Royal bank of Scotland, (which had been bought by the UK civil service during the 2008 crisis), and mentioned by another herein, who systematically did everything they could to destroy every business they came into direct contact with. Again, never brought to justice.

    Today, they have created a series of money funding, sic! mechanisms designed to load SME’s with debt, which anyone with some nous will see, clearly, is designed to allow that mafia to pick off the plums when the debts have to be repaid.

    No one with any common sense in the small business community today has any confidence in the actions or offers of the UK civil service; which is very obviously steeped in rampant corruption.

    Again, it is equally clear that the elected parliament will not act against that corruption; our elected representatives do every thing they can to continue the illusion of the quality of the civil service; assumable because they fear the consequences of trying to take on such corruption.

    Until someone with courage shuts down the UK civil service, entirely, and sets out to completely re-build it from the ground up, excluding everyone presently holding high level station, perhaps the top ten layers; while bringing in a new ethos and many young untainted leaders; nothing will change.

    • Olivier
      Apr 15, 2020 at 9:00 am

      There is something very wrong with anglo countries nowadays: UK, USA, Australia (not sure about NZ and Canada). They look more and more like gangster states.

  21. Gianni
    Apr 15, 2020 at 3:46 am

    Hi, Nick. In Italy the situation is much worse

  22. sunpearl71
    Apr 15, 2020 at 6:27 am

    Thanks for this article Nick. Clearly highlights the challenges faced by UK SMEs.

    Can you please confirm the “just 4,000 of the 300,000 companies that have applied for the funds have actually received them” statistic you quote here?

    UK Finance’s press release today states that only 28,461 companies applied for the loan scheme.

    https://www.ukfinance.org.uk/press/press-releases/banking-and-finance-sector-provides-over-%C2%A31-1-billion-to-smes-through-covid-19-lending-scheme

    • Nick Corbishley
      Apr 15, 2020 at 7:17 pm

      Sunpearl71,

      Thanks for your comment. As to your question, I got the 300,000 figure from a number of sources, including an article from The Daily Mail about the Mervyn King interview, as well as two articles from The Guardian and The Telegraph, which both cited a poll of business owners conducted by the British Chamber of Commerce. Here’s a link to The Guardian piece.
      https://www.theguardian.com/world/2020/apr/12/applicants-uk-coronavirus-business-loan-cbils

      In a Sky News interview (linked below) with the UK business secretary Alok Sharma from four days ago, Sharma admits (or at least doesn’t deny) that just 1.4% of “300,000 applicants” for the loans had actually received funds. As I’ve now discovered, those so-called “applicants” were actually people who had made loan enquiries but not formal loan applications, so I’ve asked Wolf to change the wording of the sentence as well as update the total number of recipients and the amount disbursed. Thanks enormously for the correction.

      Here’s the link to the video: https://www.mirror.co.uk/news/politics/coronavirus-business-loans-shame-just-21854058

      None of which is to say that the response of both the UK government and the banks hasn’t been shambolic, at best. In the space of almost four weeks they have managed to disburse a paltry £1.1 billion in emergency loans to small businesses, just as those businesses are going through the worst economic slowdown since the 1930s.

      Also, the total number of loan applications (28,400) cited by UK Finance, a trade association for the UK banking and financial services sector, is suspiciously low given that in Switzerland, a country whose economy is roughly a quarter the size of the UK’s, 76,000 firms had had their loan requests approved as of a week ago. My guess is that many UK firms that need the loans are having so many obstacles put in their place that they’re not getting close to even beginning, let alone finishing, the formal loan application phase.

  23. Steve clayton
    Apr 16, 2020 at 3:19 pm

    Use the UK Asset Resolution Bank which was set up to sort the Northern Rock mortgage issue out to process and issue the Loans. The High Street Banks don’t deserve any new business.

Comments are closed.